GOLDMAN: The Fire Is NOT Going To Come Out Of European Bond Markets Anytime Soon

Progress made in last week's meeting of the
European Central Bank and at the summit of EU leaders was
"material," however at the end of the day, nothing has been
implemented and nothing has really changed.

While EU leaders are clearly working towards a more sustainable
euro area, they're still waiting on an "anchor," according
to Goldman
Sachs analyst Francesco Garzarelli.

Liquidity support measures, outlines of fiscal controls, and
progress towards a permanent euro rescue fund—the European
Stability Mechanism—did constitute important accomplishments
towards a eurozone solution, but they won't be enough to stem the
tide in bond market volatility.

That said, a plan rather than the actual execution of such
measures may be enough to buck that trend. From a note out today:

Bond investors have suffered from the extreme volatility in
their product over the past six months, and are now uncomfortable
managing it. Reducing the volatility will require shaping
expectations on how sovereign credit risk will be partly
subsidized as the deleveraging process continues...The
deal on rules regulating fiscal flows and budgetary adjustments
and structural reforms are a pre-condition for a mutualisation of
credit risk. But market participants urgently need to understand
what form the latter may take if progress on the other fronts
continues.

Regardless, Goldman analysts do expect to see a truly positive
move from ECB measures, which they expect to free up €103 billion
($133.9 billion) in bank funding and encourage banks to borrow
more freely from the ECB and lend more to the markets. It still
won't completely relieve market tensions.

From Goldman's Global Investment Research team:

With funding conditions loosened, we expect banks to be less
likely to face forced deleveraging. The process of negative loan
growth is likely to stay in place, but it is also likely it
becomes milder, and slower paced.